We cannot have a solid economic recovery nor a growing private sector if our SMEs cannot expand. We need those businesses which started off as a great entrepreneurial idea keeping perhaps one or two people employed to start taking on other staff. We also need to support those businesses which have managed to keep themselves afloat as the recession raged.
My first experience as an MP of an SME not getting the support it might expect from its long-term lender related to the sudden announcement by the building society that it wanted to renegotiate the company’s mortgage because they believed the market value of the company’s premises had fallen. Unsurprisingly the lender’s surveyor concurred with that view although an independent surveyor commissioned by the company did not. The result is that the trust built up between lender and company over a period of time vanishes and new relationships have to be built up from scratch.
But this is not an isolated case. I am hearing more stories of businesses not getting the support they need from banks (and others such as insurance companies) with whom they have a long-term relationship. Overdrafts which won’t be marginally extended or even renewed (particularly necessary to allow businesses to trade if they cannot arrange credit with their suppliers), arrangement fees of over 300%, an encouragement to enter into an obviously unsuitable factoring arrangement, finding insurance harder and harder to arrange to the point where, if the final insurer says no then the business cannot continue to operate despite the fact it is highly successful.
Another example given to me is a company with a £1 million turnover which has just signed a five-year contract worth about an additional £800,000 per annum. It was looking for funding to expand to new premises and received a number of offers of loans from banks. The banks wanted 75% of the debt covered by the Enterprise Finance Guarantee scheme; the remaining 25% guaranteed by a director with a 30% shareholding in the company, plus a debenture over all the assets of the company. This is essentially a risk free loan, but the premium interest rate is 3.95% above base.
The banks, however, seem to believe that all is basically fine in the world of bank lending and claim that businesses are paying back their borrowings. I am sure in many cases that is simply because the businesses are fed up with having to deal with the difficult and mostly deaf local banks.
In the recent FSB-ICM Annual Survey of over 10,000 FSB members, 31% said if banks were to lend more, or more fairly, that would be key to improving their prospects. FSB members have used a wide variety of major sources to finance their business in the last 18 months. The most frequently used are a bank overdraft (28%), their own savings (24%) and the retained profits from the business (24%). In addition, 7% have used a personal credit card, a further 7% have used a company credit card, while around one in ten (11%) have used an overdraft. 52% of FSB members borrowed money in 2009. The majority of firms have borrowed less than £20,000. One in twenty (5%) has taken between £20,001 and £30,000 and the same proportion (5%), between £30,001 and £50,000.
Even the Governor of the Bank of England realises there is a problem. In highly unusual comments in July Mervyn King recently said it was “heartbreaking” to see so many firms going under because they could not get the credit to survive.
The Government launched a consultation entitled “Financing a private sector recovery” in July. It includes a helpful review of financing options – bank lending, equity markets, private placements, bond markets – open to different sized firms which shows that unless a company is large (defined as having a turnover of above £500 million) then anything other than bank lending is probably not open to them.
Surely this is an opportune moment for our banks, financiers and private equity funds, who have been so heavily criticised, to find a way to invest in our SMEs. In 1945 the predecssors to 3i were set up. As summarised on 3i’s website:
“The [Industrial and Commercial Financial Corporation] was established to serve small and medium sized businesses through the provision of long term and permanent capital (typical investments of £5,000-£200,000). It was exclusively funded by the major clearing banks and the Bank of England, who collectively agreed to provide share and loan capital up to £45m. In the same year, the [Finance Corporation for Industry] was founded with £25m of capital and the ability to borrow a further £100m. Share capital was subscribed by insurance companies, investment trust companies and the Bank of England with a remit to provide capital (principally in the form of debt) in larger amounts than the ICFC to facilitate the rationalisation and restructuring of key sectors of British industry and for post-war re-equipment.”
Surely the time has come for our rather discredited banks, including those now majority owned by the Government plus HM Treasury and the Bank of England to pull together a 21st Century version of 3i which takes a longer-term view of business prospects than currently seems to be the case. As the FSB survey shows, most small businesses are not looking for a great deal of funding but the difference between them not having any help or support and getting a small amount could be the difference between a growing private sector taking on more employees and a stalling economy.